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When tax season comes, immigrants, especially immigrants holding non-immigrant visas, such as L-1 and H-1 visa holders, have to figure out whether their global income will be taxable in the U.S.Especially for those who apply for EB-1C multinational managers and executive transferee visasand EB-5 investor immigration visas, this issue is especially important because of the global nature of their income. To answer this question, we must first figure out whose income will be taxed.

Generally speaking, except for foreign students, exchange students, exchange scholars and exchange trainees, all income derived from employment, trade and business in the U.S., or income from assets primarily located in the U.S.,called “effectively connected income,” is taxable under U.S. tax law.  In other words, U.S.-generatedincome will be taxable under U.S law.However, when the income is not U.S. derived income, there is huge difference between resident alien and nonresident alien as defined by tax law. According to the IRS’ explanation, “A resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether from sources within or outside the United States.” That is to say, global income will be taxed to the U.S. if one is deemed a resident alien under U.S. tax law. While if you are a nonresident alien, you can only report your U.S. derived income; while you are a resident alien, you must report ALL your income for tax purposes.

Who is a resident alien under tax law?

The IRS adopts two primary tests, the substantial presence test and the lawful permanent resident (green card) test. If either of the two tests is met, the alien will be deemed a resident alien and his global income will be taxed just like that of a U.S. citizen.

Substantial Presence Test

You will be considered a resident alien for tax purposes if you are physically present in the United States for at least:

1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
   
   a, All the days you were present in the current year; and
   
   b, 1/3 of the days you were present in the year prior to the current year, and
   
   c, 1/6 of the days you were present in two years prior to the current year.

• Here are some possible examples:
  
  

Example 1:

Kevin is present in the U.S.for 28 days in 2011, and for the entire year during2010 and 2009. How many days he will be counted in the 3-year period?

Based on the calculation method above, the days in which Kevin was present in the U.S. during the 3-year period will be 28+ (365/3) + (365/6) =210.5 days.

Will Kevin be deemed a resident alien?

No, the first prong, which requires that he stay in US for at least 31 days in the current year(2011), is not met.  Thus, he does not meet the substantial presence test.

Example 2:

If Peter is present in the U.S.for 60 days in 2011, 60 days in 2010, and 60 days in 2009, will Kevin be counted as a resident alien for tax purposes?

The days in the 3-year period that Kevin will be considered present will be 60+60/3+60/6=90 days. Therefore, he will not be deemed a resident alien for tax purposes because his presence during the 3-year period is less than 183 days (the second prong).

Days in the U.S. during which an alien is classified as an “exempt individual” under U.S. tax law do not count towards the substantial presence test. The relevant categories of visas include: foreign government-related individuals, J or Q teachers or trainee visa holders, and F, J, M, Q students, scholars and professional athletes visa holders.

Dual Status Resident/Non-Resident Aliens

There are a few exceptions to the substantial presence test enabling an alien to opt out of being classified as a resident alien, even if he has met the criteria of the test.  One such exception is the closer connection exception. If you are present in the United States for fewer than 183 days during the current calendar year, you maintain a tax home in a foreign country during the year, and you have a closer connection to that country than to the United States, you may elect not to be counted.

Also, if there is a tax treaty between your country and the U.S., residency may be defined under the treaty.  The U.S. tax tests for residency do NOT apply if there is a tax treaty in place defining residency.  Instead, you must consult the treaty definition of residency for tax purposes and use those rules to define your residency for U.S. tax purposes.

Finally, in some situations, it is possible to be taxed as a nonresident alien for part of the year, and a resident alien for the rest of the year.  For example, if you do not meet the green card test or the substantial presence test, but you will meet the substantial presence test in the following taxable year, you may be allowed to file as a dual status resident alien in the current taxable year.

For example, Sara arrives in the U.S. as an H-1B visa holder on December 2, 2011.  She does not have at least 31 days in the U.S. before the end of 2011, and this is her first time in the U.S.  Thus, for the taxable year of 2011, Sara does not meet the substantial presence test.  However, for the next taxable year, 2012, she will be here for the entire year, all 365 days (2012 is a leap year with an extra day in February).  She will meet the substantial presence test in 2012, because she is here for more than 183 days.  Thus, Sara can file her taxes as a resident in 2011, because, although she does not meet the substantial presence test in 2011, she will meet it in the very next year, 2012.

Green Card Test

This test is fairly clear. If you become a Permanent Resident of the US, you satisfy this test as a resident alien for tax purposes. This status will continue as long as you are a Permanent Resident of the US, unless your green card is otherwise rescinded or abandoned.

If you meet the green card test at any time during the calendar year, but do not meet the substantial presence test for that year, your residency start date is the first day on which you are present in the United States as a Lawful Permanent Resident. However, an alien who has been present in the United States at any time during a calendar year as a Lawful Permanent Resident may choose to be treated as a resident alien for the entire calendar year.

For example, Kathy received her green card on September 15, 2011.Now it is September 28, and she will be deemed a resident alien for tax purposes even though she does not meet the substantial presence test (remember that the 1st prong of the test is that the alien be present more than 31 days of during the current year). Her resident alien status for tax purposes will start at September 15, 2011, the day her green card was issued.  For tax purposes, shemay choose to be treated as a resident alien for the entire year of 2011, or only for the part of the year beginning September 15.

Nonresident Aliens Married to Resident Aliens or U.S. Citizens

When a nonresident alien is married to a resident alien or U.S. citizen and they want to file a joint tax return, then they may elect to treat the nonresident alien spouse as a resident alien for tax purposes.  If you and your spouse elect to do this, then the nonresident alien spouse will be treated as a resident alien for the entire tax year, even though the nonresident alien spouse does not meet either the substantial presence or the green card test.  You can even consider your nonresident spouse a resident for federal withholding purposes in your paycheck.  If the resident alien spouse loses or revokes resident alien status, however, then both spouses are treated as nonresident aliens for tax purposes.  Death, legal separation and divorce also terminate resident alien tax status for the nonresident alien spouse.

Why would an alien want to be taxed as a resident alien?

Some people may wonder why an alien would want to have his global income taxed under U.S. law. One reason is that some aliens may not have global income. Also, a resident alien can claim a personal tax exemption and dependent tax exemption in accordance with U.S. law, thus potentially reducing their total tax.  Finally, an alien may want to take advantage of tax credits that are available under U.S. law, such as the Lifetime Learning Credit or the Earned Income Tax Credit.

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Founded in 1996, Zhang & Associates, P.C. offers legal services to clients nationwide in all aspects of U.S immigration law. We have successfully handled thousands of immigration cases.

At Zhang & Associates, P.C., our attorneys and supporting professionals are committed to providing high-quality immigration and non-immigration visa services. We specialize in NIW, EB-1, PERM, and I-485 cases. In the past fifteen years, we have successfully helped thousands of clients get green cards. If you plan to apply for a green card, please send your CV to Attorney Jerry Zhang (info@hooyou.com) for a free evaluation.

Zhang & Associates, PC.

Silicon Valley • New York • Los Angeles • Chicago • Houston • Austin

Tel:	1-800-230-7040, 713-771-8433
Email:	info@hooyou.com
website:	http://www.hooyou.com

 

(09/29/2011)